Interesting point about car PCP financing at the end of the article. I bought a car through a PCP a few years back (a new 2013 Mazda) and it seemed fairly humane:
- Nominally 0% interest (albeit we paid sticker price of the vehicle with no discount).
- Deposit + payments such that the car was never 'under water'. In fact, subject to some heavy caveatting about its condition, I think we could have handed the car back and walked away from the agreement at any time, something almost unheard-of in American-style car loans.
- At the end of the PCP period, there was still a big balloon payment, which is how they get you rolling onto a new car+contract of course. But it was a known quantity that was possible to save up for, and due to the monthly payments, as mentioned above, being of sufficient size, the balloon payment was much less than the cost to buy the same car in same age/condition/etc on the open market, so it made sense to pay the money and keep the car.
There are a couple of things I find interesting about the above. One is that I perceived some benefits from the monthly payments being larger rather than smaller - when considering time value of money etc this is presumably irrational. But people do seem to genuinely suffer from upside-down car loans, where they could 'afford' the payments but find themselves trapped making them on an un-sellable vehicle. I guess what I'm saying is the payments were set at a level where I could actually afford the car. The other interesting thing is how easily the formula could be tweaked to make more expensive cars look affordable, and to incentivise rolling onto another contract. The flip side is that such tweaks let the purchaser have a lower payment, or a nicer car for the same payment, but might not be in the purchaser's rational best interest.
- Nominally 0% interest (albeit we paid sticker price of the vehicle with no discount).
- Deposit + payments such that the car was never 'under water'. In fact, subject to some heavy caveatting about its condition, I think we could have handed the car back and walked away from the agreement at any time, something almost unheard-of in American-style car loans.
- At the end of the PCP period, there was still a big balloon payment, which is how they get you rolling onto a new car+contract of course. But it was a known quantity that was possible to save up for, and due to the monthly payments, as mentioned above, being of sufficient size, the balloon payment was much less than the cost to buy the same car in same age/condition/etc on the open market, so it made sense to pay the money and keep the car.
There are a couple of things I find interesting about the above. One is that I perceived some benefits from the monthly payments being larger rather than smaller - when considering time value of money etc this is presumably irrational. But people do seem to genuinely suffer from upside-down car loans, where they could 'afford' the payments but find themselves trapped making them on an un-sellable vehicle. I guess what I'm saying is the payments were set at a level where I could actually afford the car. The other interesting thing is how easily the formula could be tweaked to make more expensive cars look affordable, and to incentivise rolling onto another contract. The flip side is that such tweaks let the purchaser have a lower payment, or a nicer car for the same payment, but might not be in the purchaser's rational best interest.